Real estate equity is basically the value of your primary home or investment property minus how much you owe on the mortgage. When you own a home and pay down the mortgage every month, you owe less and less on your loan. By doing so, it increases your equity in the home!
Ever wondered why most of the wealthiest people in America have their hands in real estate? The power of equity! It’s then important that you learn as much as you can when it comes to this topic. Real estate equity contributes to the majority of the Net Worth for Americans
That was the abridged version, but there are a few more things to take into consideration when talking about equity in real estate.
Here’s an example of what real estate equity is
If you have equity in your home, it means the home is worth more than what you owe your lender on your mortgage. How much it’s worth is determined by an appraisal. The appraisal looks at how much similar homes near you are selling for, the condition and upgrades to your home, and then determines what it’s worth today (if you were to sell it). Here’s an example
- If you buy your house for $300,000, you put down 20% as a down payment ($60,000). You immediately have $60,000 equity in the home.
- If after 5 years you pay down your mortgage loan by $15,000, you now have $75,000 equity
- Then if the home over 10 years increases in value by $50,000, you now have $125,000 equity
So using this example, if you then sold your home after all the items above have happened, you will walk away with $125,000 cash (before closing costs, realtor commissions, taxes, and other fees).
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Is equity real cash?
Yes and no! Real estate equity is not liquid at all, which means to actually get cash from your equity, you would have to you sell your house first.
Real estate is the least liquid kind of investment because unlike many other investments, you can’t just wake up tomorrow and get cash out at the ATM! So if you sell your house for more than you owe on it, and pay all transaction fees, yes you get cash from the equity.
So what’s the point?
Simply put, real estate is a store of wealth! Unlike storing your money in the bank and having it sit there, you gain equity over time when the land where your home sits appreciates. In a growing economy, your home literally makes you wealthier while you sleep. No other kind of investment does that.
You can look at your home as a “mandatory savings account” since you’re forced to pay down the mortgage, and by doing so, you owe less and less, whereas the home increases in value.
How can I figure out how much equity I have?
The first part is figuring out how much you owe on the home at this time. You can look at your last mortgage statement, or log into your mortgage lender and see your current balance. This will tell you how much you still owe on your home.
After you figure that out, you will have to figure out how much your home is worth. To get a quick idea of how much it’s worth, you can use services like Zillow and enter your address to get a quick estimate. It’s not always accurate, but it’s usually pretty close.
You can also hire an appraiser to appraise your home and get an accurate worth of your home. Once you have those two numbers, subtract what the home is worth, and what you owe. That’s how much real estate equity you have.
I personally use Personal Capital to keep track of my equity, and in turn my net worth! I suggest you check it out! It’s free after all 🙂
Can I use the equity without selling the home?
Yes! A lot of people actually tap into their Home Equity to get cash out. This isn’t free though! You are basically borrowing against your equity as a loan, and it has monthly payments just like a loan. You can either use a Home Equity Loan (HELOC) or Home Equity Loan. Because it’s secured by a home, you typically get very low interest rates since its a much lower risk for banks. People usually use this credit for
- Paying off high interest rate credit cards
- Some buy investment properties with it
- You can use it for improvements on the home
Do I have to pay it back?
Nope! Real Estate Equity on your home is literally your money. The only thing you pay back on a home is the mortgage. That’s the amount of money you borrowed when buying the home. Any equity you gain over time from appreciation and paying down the loan is all yours.
How do I build equity and how long does it take?
Equity builds as you pay down your mortgage loan, and the property stays or increases in value over time. Basically:
- You owe less on your mortgage, building equity
- Your home appreciates over time, building your equity
For most people, building equity takes time. Like, years. It starts off very slowly, especially if you put a low down payment when you bought the home. This is because the majority of your monthly payment goes to the interest and less on principal. The more you pay down, the more principal you will begin to pay down. As the years go by, and the property appreciates, the equity will build.